[Federal Register Volume 82, Number 87 (Monday, May 8, 2017)]
[Proposed Rules]
[Pages 21330-21337]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-09229]


=======================================================================
-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 3

RIN 3038-AE56


Chief Compliance Officer Duties and Annual Report Requirements 
for Futures Commission Merchants, Swap Dealers, and Major Swap 
Participants; Amendments

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is proposing to amend its regulations regarding certain 
duties of chief compliance officers (``CCOs'') of swap dealers 
(``SDs''), major swap participants (``MSPs''), and futures commission 
merchants (``FCMs'') (collectively, ``Registrants''); and certain 
requirements for preparing and furnishing to the Commission an annual 
report containing an assessment of the Registrant's compliance 
activities.

DATES: Comments must be received on or before July 7, 2017.

ADDRESSES: You may submit comments, identified by RIN 3038-AE56, by any 
of the following methods:
     CFTC Web site: https://comments.cftc.gov. Follow the 
instructions for submitting comments through the Comments Online 
process on the Web site.
     Mail: Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW., Washington, DC 20581.
     Hand Delivery/Courier: Same as Mail, above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    Please submit your comments using only one method.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
www.cftc.gov. You should submit only information that you wish to make 
available publicly. If you wish the Commission to consider information 
that is exempt from disclosure under the Freedom of Information Act 
(``FOIA''),\1\ a petition for confidential treatment of the exempt 
information may be submitted according to the procedures set forth in 
Sec.  145.9 of the Commission's regulations.\2\
---------------------------------------------------------------------------

    \1\ 5 U.S.C. 552.
    \2\ 17 CFR 145.9. Commission regulations referred to herein are 
found at 17 CFR chapter I.
---------------------------------------------------------------------------

    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from www.cftc.gov that it may deem to be inappropriate for 
publication, such as obscene language. All submissions that have been 
redacted or removed that contain comments on the merits of the 
rulemaking will be retained in the public comment file and will be 
considered as required under the Administrative Procedure Act and other 
applicable laws, and may be accessible under the FOIA.

FOR FURTHER INFORMATION CONTACT: Eileen T. Flaherty, Director, 202-418-
5326, [email protected]; Erik Remmler, Deputy Director, 202-418-7630, 
[email protected]; Laura Gardy, Associate Director, 202-418-7645, 
[email protected]; Pamela M. Geraghty, Special Counsel, 202-418-5634, 
[email protected]; or Fern B.

[[Page 21331]]

Simmons, Special Counsel, 202-418-5901, [email protected], Division of 
Swap Dealer and Intermediary Oversight, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, 
DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Background

A. Statutory and Regulatory Background

    As amended by the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (``Dodd-Frank Act''),\3\ sections 4d(d) and 4s(k) of the 
Commodity Exchange Act (``CEA'' or ``Act'') require each Registrant to 
designate an individual to serve as its CCO.\4\ Sections 4s(k)(2) and 
(3) set forth certain requirements and duties for CCOs of SDs and MSPs, 
including the requirement to prepare and sign an annual compliance 
report (``CCO Annual Report'').\5\ CEA section 4d(d) requires CCOs of 
FCMs to ``perform such duties and responsibilities'' as are established 
by Commission regulation or the rules of a registered futures 
association.\6\ In 2012, the Commission adopted regulations 3.3(d) 
through (f) implementing the duties described in CEA sections 4d(d) and 
4s(k).\7\
---------------------------------------------------------------------------

    \3\ See Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376 
(2010).
    \4\ 7 U.S.C. 6d(d) and 6s(k)(1).
    \5\ 7 U.S.C. 6s(k)(2) and (3).
    \6\ 7 U.S.C. 6d(d).
    \7\ 17 CFR 3.3(d)-(f). See Swap Dealer and Major Swap 
Participant Recordkeeping, Reporting, and Duties Rules, 77 FR 20128 
(Apr. 3, 2012) (``CCO Rules Adopting Release''). For purposes of 
this release, these rules will be referred to as the ``CCO Rules.''
---------------------------------------------------------------------------

B. Consistency With SEC Rules

    Using language identical to CEA section 4s(k), the Dodd-Frank Act 
amended the Securities Exchange Act of 1934 (``Exchange Act'') by 
adding section 15F(k) to establish the same CCO requirements for 
security-based swap dealers and major security-based swap participants 
(collectively, ``SEC Registrants'').\8\ In compliance with sections 
712(a)(1)-(2) of the Dodd-Frank Act, the Commission and SEC staffs 
consulted and coordinated together and with prudential regulators in 
developing the respective CCO rules for purposes of regulatory 
consistency and comparability.\9\
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78o-10(k).
    \9\ Public Law 111-203, 124 Stat. 1376, 1641-1642 (codified at 
15 U.S.C. 8302(a)(1)-(2)).
---------------------------------------------------------------------------

    The SEC initially proposed rule 15Fk-1 to implement CCO 
requirements and duties for SEC Registrants in July 2011.\10\ In May 
2013, after the CFTC adopted the CCO Rules, the SEC re-opened the 
comment period for its outstanding Dodd-Frank Act Title VII 
rulemakings, including rule 15Fk-1.\11\ In its reopening release, the 
SEC sought comment on, among other things: (1) The relationship of the 
proposed SEC rules to any parallel CFTC requirements; and (2) the 
extent to which the SEC should emphasize consistency with the CFTC 
rules or should tailor its rules to the security-based swap market.\12\ 
Comments received by the SEC largely urged the SEC to harmonize its 
business conduct rules, including rule 15Fk-1, with those of the CFTC 
because the industry had already implemented the CFTC's 
regulations.\13\ Specifically, with respect to supervision and CCO 
obligations, commenters urged that the SEC's final rules ``be informed 
by industry experience complying with . . . the CFTC internal business 
conduct standards'' among others.\14\ A number of comments also 
suggested specific conforming modifications to the SEC's proposed 
rules.\15\
---------------------------------------------------------------------------

    \10\ See Business Conduct Standards for Security-Based Swap 
Dealers and Major Security-Based Swap Participants, 76 FR 42396 
(proposed Jul. 18, 2011).
    \11\ See Reopening of Comment Periods for Certain Rulemaking 
Releases and Policy Statement Applicable to Security-Based Swaps, 78 
FR 30800 (May 23, 2013).
    \12\ Id. at 30802.
    \13\ Business Conduct Standards for Security-Based Swap Dealers 
and Major Security-Based Swap Participants, 81 FR 29960, 29964 (May 
13, 2016) (``SEC Adopting Release'').
    \14\ Id. at 29964 n.31.
    \15\ Id.
---------------------------------------------------------------------------

    SEC staff continued to consult with CFTC staff leading up to 
adoption of the SEC's business conduct standards rules, which became 
effective July 12, 2016.\16\ As explained in the SEC Adopting Release, 
the SEC modified the proposed rules ``to harmonize with CFTC 
requirements to create efficiencies for entities that have already 
established infrastructure for compliance with analogous CFTC 
requirements'' where such modifications ``will continue to provide the 
protections (as explained in the context of the particular rule) that 
the rules were intended to accomplish.'' \17\
---------------------------------------------------------------------------

    \16\ 17 CFR 240.15Fk-1. See SEC Adopting Release, 81 FR at 
29960.
    \17\ SEC Adopting Release, 81 FR at 29964.
---------------------------------------------------------------------------

C. Further Harmonization

    Although the SEC's CCO rules are largely harmonized with the CFTC's 
corresponding regulations, rule 15Fk-1 as adopted differs in several 
respects. Based on CFTC staff experience in implementing the CCO Rules, 
review of the comments to the proposed SEC rule 15Fk-1, and discussions 
with SEC staff, the Commission believes that some of the differences 
adopted by the SEC are beneficial for market participants and 
regulatory oversight.
    The CCO Rules, among other things, seek to ensure that the CCO is 
actively engaged in compliance activities with the appropriate 
authority, resources, and access to the board of directors or senior 
officer to administer the firm's compliance activities.\18\ As 
described below, the proposed amendments to the CCO Rules preserve 
these objectives and should increase efficiencies, reduce regulatory 
burden, particularly for dual registrants, and further clarify the 
scope of CCO duties.
---------------------------------------------------------------------------

    \18\ See, e.g., CCO Rules Adopting Release, 77 FR at 20161-2.
---------------------------------------------------------------------------

II. The Proposal

A. Regulation 3.1--Definitions

    The Commission proposes to add a definition of ``senior officer'' 
to Sec.  3.1 to provide greater clarity regarding the CCO reporting 
line required by CEA section 4s(k)(2)(A) and Sec.  3.3(a)(1) of the 
Commission's regulations.\19\ The Commission has not previously 
formally defined this term for purposes of the CCO Rules. However, 
Commission staff has generally interpreted this term to refer to a 
Registrant's most senior officer, typically the chief executive officer 
or the equivalent. This interpretation is consistent with the SEC's 
definition of ``senior officer'' in SEC rule 15Fk-1(e)(2). Accordingly, 
the Commission is proposing to define ``senior officer'' in new 
paragraph (j) to Sec.  3.1 as ``the chief executive officer or other 
equivalent officer of a registrant.''
---------------------------------------------------------------------------

    \19\ 7 U.S.C. 6s(k)(2)(A); 17 CFR 3.3(a)(1).
---------------------------------------------------------------------------

    This definition is in keeping with the Commission's continued 
belief that, as stated in the CCO Rules Adopting Release, a ``direct 
reporting line'' from the CCO to the board of directors or highest 
executive officer ensures CCO independence.\20\ The ``chief executive 
officer'' is typically the highest executive level, but the definition 
includes the phrase ``other equivalent officer'' to acknowledge that a 
firm may have a different title for the highest executive officer.
---------------------------------------------------------------------------

    \20\ See CCO Rules Adopting Release, 77 FR at 20160. As noted in 
the release, reporting to a senior officer of a division of a larger 
company would be appropriate only when that division is registered 
as a swap dealer (i.e., a limited swap dealer designation under 17 
CFR 1.3(ggg)(3)). Id.
---------------------------------------------------------------------------

    Request for comment: The Commission requests comment regarding the 
proposed definition in Sec.  3.1. The Commission specifically requests 
comment on the following questions:

[[Page 21332]]

     Should the proposed definition for ``senior officer'' be 
revised? If yes, please provide alternative suggestions.
     Should other definitions be added?

B. Regulation 3.3(d)--Chief Compliance Officer Duties

    Paragraph (d) of Sec.  3.3 implements the CCO duties required by 
CEA section 4s(k). Generally, paragraph (d) requires the CCO to: (1) 
Establish and administer policies and procedures, including those 
related to ensuring compliance and remediating noncompliance issues; 
(2) resolve any conflicts of interest; and (3) prepare the CCO Annual 
Report. Based on the practical experience gained from four years of 
implementation, the Commission has determined that certain CCO Rules 
could be revised to more accurately convey the Commission's intent with 
respect to the scope of the CCO's duties and to further harmonize with 
the SEC's recently finalized CCO rules. In this regard, the proposed 
amendments are intended to maintain and clarify the underlying goal of 
the CCO's active engagement in compliance monitoring while reducing 
regulatory burdens that provide limited corresponding benefit.\21\
---------------------------------------------------------------------------

    \21\ See CCO Rules Adopting Release, 77 FR at 20161-2.
---------------------------------------------------------------------------

1. Regulation 3.3(d)(1)--Duty To Administer Compliance Policies and 
Procedures
    Paragraph (d)(1) of Sec.  3.3 implements CEA section 4s(k)(2)(D), 
which requires a CCO to ``be responsible for administering each policy 
and procedure that is required to be established pursuant to this 
section.'' \22\ The current text of Sec.  3.3(d)(1) states that the 
CCO's duties include ``administering the registrant's policies and 
procedures reasonably designed to ensure compliance with the Act and 
Commission regulations.'' \23\ The Commission is proposing to amend 
Sec.  3.3(d)(1) to require the CCO to administer ``each of the 
registrant's policies and procedures relating to its business as a 
futures commission merchant, swap dealer, or major swap participant 
that are required to be established pursuant to the Act and Commission 
regulations.''
---------------------------------------------------------------------------

    \22\ 7 U.S.C. 6s(k)(2)(D).
    \23\ 17 CFR 3.3(d)(1).
---------------------------------------------------------------------------

    The proposed change clarifies that the CCO is responsible for 
administering the policies and procedures specifically related to the 
Registrant's business as a SD, MSP, or FCM, as applicable, not all of 
the Registrant's business that may otherwise be subject to CFTC 
regulation. Further, the proposed change more closely tracks the 
language of CEA section 4s(k)(2)(D) and is consistent with the 
Commission's stated intent when finalizing the CCO Rules.\24\ Finally, 
the amended rule text more closely tracks the language of the SEC's 
parallel rule \25\ and should alleviate concerns regarding consistency 
with the SEC's interpretation of identical statutory language as it 
applies to dual CFTC Registrants and SEC Registrants.
---------------------------------------------------------------------------

    \24\ CCO Rules Adopting Release, 77 FR at 20158. (``[T]he 
Commission is clarifying in the final rules that the CCO's duties 
extend only to the activities of the registrant that are regulated 
by the Commission, namely swaps activities of SDs and MSPs and the 
derivatives activities included in the definition of FCM under 
section 1(a)(28) of the CEA.'').
    \25\ 17 CFR 240.15Fk-1(b)(4).
---------------------------------------------------------------------------

2. Regulation 3.3(d)(2)--Resolving Conflicts of Interest
    Paragraph (d)(2) of Sec.  3.3 requires the CCO to, in consultation 
with the board of directors or the senior officer, resolve any 
conflicts of interest that may arise. The Commission is proposing to 
modify Sec.  3.3(d)(2) to clarify that the CCO must take ``reasonable 
steps'' to resolve conflicts. This proposed change makes explicit an 
implied reasonableness standard and recognizes that resolution of non-
material conflicts need not always require the CCO's direct expertise 
or directly involve the board of directors or senior officer.\26\
---------------------------------------------------------------------------

    \26\ The CEA and Exchange Act require CCO's to ``in consultation 
with the board of directors, a body performing a function similar to 
the board, or the senior officer of the organization, resolve any 
conflicts of interest that may arise.'' 7 U.S.C. 6s(k)(2)(C) and 15 
U.S.C. 78o-10(k)(2)(C).
---------------------------------------------------------------------------

    The Commission is of the view that a CCO's duty to resolve 
conflicts of interest should not be interpreted to require the CCO to 
personally resolve every potential conflict of interest that may arise 
or require consultation with the board of directors or senior office. 
If strictly interpreted, the current rule text creates an undue burden 
on CCOs, likely taking them away from more important compliance 
activities. The proposed changes are intended to clarify that routinely 
encountered conflicts could be resolved in the normal course of 
business consistent with the CCO's general administration of internal 
policies and procedures, which must include conflicts of interest 
policies.\27\ With this amendment, the CCO and his or her resources may 
more effectively engage in working to resolve conflicts practically and 
within normal business operations procedures.
---------------------------------------------------------------------------

    \27\ See 7 U.S.C. 6s(k)(3)(A)(ii) (requiring policies and 
procedures to include conflicts of interest policies).
---------------------------------------------------------------------------

    Similarly, the SEC in its adopting release noted that the CCO's 
role in resolving conflicts of interest would likely include the 
recommendation of actions to resolve the conflict, as well as the 
escalation and reporting of issues related to resolution, but not 
executing the business decisions to ultimately resolve the 
conflict.\28\ The SEC articulated this understanding in its final rule 
15Fk-1(b)(3) by requiring a CCO to ``take reasonable steps'' to resolve 
conflicts of interests. The Commission believes it is appropriate to 
incorporate this language into Sec.  3.3(d)(2) to more accurately 
reflect its interpretation of the statutory requirement.
---------------------------------------------------------------------------

    \28\ See SEC Adopting Release, 81 FR at 30057 (stating that 
``the primary responsibility for the resolution of conflicts 
generally lies with the business units . . . .'').
---------------------------------------------------------------------------

3. Regulation 3.3(d)(3)--Ensuring Compliance
    The Commission proposes to amend paragraph (d)(3) of Sec.  3.3 to 
incorporate further guidance regarding the extent of a CCO's compliance 
duties. Current Sec.  3.3(d)(3) effectuates CEA section 4s(k)(2)(E) 
\29\ by requiring CCOs to take ``reasonable steps to ensure compliance 
with the Act and Commission regulations relating to the swap dealer's 
or major swap participant's swaps activities, or to the futures 
commission merchant's business as a futures commission merchant.'' \30\ 
The Commission proposes to amend Sec.  3.3(d)(3) by clarifying that the 
CCO's duty in this subsection includes ``ensuring the registrant 
establishes, maintains and reviews written policies and procedures 
reasonably designed to achieve compliance'' with the Act and Commission 
regulations. This change is consistent with the SEC's parallel 
rule.\31\
---------------------------------------------------------------------------

    \29\ 7 U.S.C. 6s(k)(2)(E) imposes a duty on CCOs to ``ensure 
compliance with this Act [CEA] (including regulations) relating to 
swaps, including each rule prescribed by the Commission under this 
section.''
    \30\ 17 CFR 3.3(d)(3).
    \31\ 17 CFR 240.15Fk-1(b)(2).
---------------------------------------------------------------------------

    When finalizing Sec.  3.3(d)(3), the Commission intended to address 
commenter concerns that fully ``ensuring compliance'' with the CEA 
could be an impracticable standard for CCOs and that the regulatory 
responsibility for ensuring compliance is ultimately borne by the 
registrant.\32\ The Commission modified the proposal in the final rule 
by limiting the CCO duties to taking ``reasonable steps to ensure 
compliance'' rather than simply ``ensure compliance.'' \33\
---------------------------------------------------------------------------

    \32\ See CCO Rules Adopting Release, 77 FR at 20162.
    \33\ In making this modification, the Commission considered the 
SEC's similar interpretation of the duty to ensure compliance in its 
proposed rule effectuating identical statutory language. See id.

---------------------------------------------------------------------------

[[Page 21333]]

    Notwithstanding the change made to the final CCO Rules, during the 
more than four years of implementing Sec.  3.3(d)(3), CCOs and their 
representatives have expressed concern about the uncertainty as to the 
breadth of their required authority under the rule. Accordingly, by 
amending Sec.  3.3(d)(3), the Commission intends to address uncertainty 
caused by the current text of Sec.  3.3(d)(3) by specifically 
identifying the CCO's duties with regard to compliance policies and 
procedures.\34\ The amended language also will further harmonize with 
the SEC's final interpretation of the role of the CCO.\35\
---------------------------------------------------------------------------

    \34\ See Designation of a Chief Compliance Officer; Required 
Compliance Policies; and Annual Report of a Futures Commission 
Merchant, Swap Dealer, or Major Swap Participant, 75 FR 70881, 70883 
(proposed Nov. 19, 2010) (``Underlying all of these duties are two 
fundamental acknowledgements: The chief compliance officer can only 
ensure the registrant's compliance to the full capacity of an 
individual person, and the duties of the chief compliance officer do 
not elevate the position above the board of directors, or otherwise 
contradict basic and well-established tenets of law regarding the 
allocation of responsibility within a business association.'').
    \35\ In finalizing its rules for SEC Registrants, the SEC 
departed from its proposed language and similarly concluded that, 
``it is the responsibility of the SBS Entity, not the CCO in his or 
her personal capacity, to establish and enforce required policies 
and procedures.'' See SEC Adopting Release, 81 FR at 30056.
---------------------------------------------------------------------------

4. Regulations 3.3(d)(4) and (5)--Remediation of Noncompliance Issues
    Paragraphs (d)(4) and (5) currently require a CCO to establish 
procedures, in consultation with the board of directors or the senior 
officer, for (1) the remediation of noncompliance issues identified by 
the CCO and (2) the handling, management response, remediation, 
retesting, and closing of noncompliance issues.\36\ The Commission 
proposes to remove the consultation requirement in paragraphs (d)(4) 
and (5) as superfluous and clarify that the policies and procedures be 
``reasonably designed'' to achieve the stated purpose. In removing the 
consultation requirement, the Commission acknowledges that in carrying 
out their duties, a CCO should manage and remediate compliance issues 
by consulting, as appropriate, with business lines, senior management, 
the board of directors, and independent review groups.
---------------------------------------------------------------------------

    \36\ 17 CFR 3.3(d)(4) and (5).
---------------------------------------------------------------------------

    Furthermore, the Commission is proposing to amend Sec.  3.3(d)(4) 
to include remediating matters identified ``through any means'' by the 
chief compliance officer in addition to the specific detection methods 
listed in the rule text. This change addresses a concern discussed in 
the SEC Adopting Release that the list of specific methods in the 
current regulatory text could be viewed as a limit on noncompliance 
event discovery methods.\37\ The flexibility added by this change is 
particularly meaningful given advances in automated compliance 
monitoring technology.
---------------------------------------------------------------------------

    \37\ See SEC Adopting Release, 81 FR at 30056.
---------------------------------------------------------------------------

    Request for comment: The Commission requests comment regarding the 
proposed amendments to the CCO duties in Sec.  3.3(d). The Commission 
specifically requests comment on the following questions:
     Are the proposed revisions to the CCO duties appropriate? 
If not, what modifications to the duties should be made?
     Do the proposed amendments create added efficiencies for 
dual CFTC and SEC Registrants?
     To what extent do the proposed amendments reduce burdens 
and costs for Registrants?
     Do any of the proposed amendments create any additional 
burdens or costs for Registrants?
     Should the Commission revise any other requirements under 
Sec.  3.3(d)? If so, which ones and why?
     Should the Commission seek to further harmonize the 
requirements under Sec.  3.3(d) with parallel SEC requirements?

C. Proposed Amendments to Regulations 3.3(e) and (f)--CCO Annual 
Reporting

    CEA section 4s(k)(3) requires the CCO to annually prepare and sign 
the CCO Annual Report and Commission Sec.  3.3(e) and (f) implement 
this requirement.\38\ The Commission proposes to revise, reorganize, 
and clarify Sec.  3.3(e) and (f) to further reduce burdens to 
Registrants, incorporate related proposed amendments to Sec.  3.3(d), 
and further harmonize with the SEC's parallel rules. When the 
Commission proposed Sec.  3.3(e) and (f), it stated that the intended 
purposes for these rules were to: (1) Promote compliance behavior 
through periodic self-evaluation; and (2) inform the Commission of 
possible compliance weaknesses.\39\ Further, in the adopting release, 
the Commission noted that the rules will assist the Registrant and the 
Commission in determining whether the Registrant remains in compliance 
with the CEA and Commission regulations.\40\ The Commission is 
reaffirming these stated purposes and believes that the proposed 
revisions will more effectively further these goals.
---------------------------------------------------------------------------

    \38\ 7 U.S.C. 6s(k)(3) and 17 CFR 3.3(e) and (f).
    \39\ 75 FR at 70883.
    \40\ See CCO Rules Adopting Release, 77 FR at 20193 (``The 
annual compliance report will help FCMs, SDs, MSPs, and the 
Commission to assess whether the registrant has mechanisms in place 
to address adequately compliance problems that could lead to a 
failure of the registrant. It also will assist the Commission in 
determining whether the registrant remains in compliance with the 
CEA and the Commission's regulations . . . . '').
---------------------------------------------------------------------------

1. Regulation 3.3(e)--Annual Report
    Paragraph (e)(1) of Sec.  3.3 implements CEA section 
4s(k)(3)(A)(ii) and requires the CCO Annual Report to include a 
description of the Registrant's written policies and procedures 
(``WPPs''), including the code of ethics and conflicts of interest 
policies. The Commission is proposing to amend Sec.  3.3(e)(1) to 
further clarify which WPPs must be described in the CCO Annual Report 
by referencing the WPPs described in paragraph (d), as amended.
    Paragraphs (e)(2)(i), (ii), and (iii) of Sec.  3.3 currently 
require the CCO Annual Report to identify the Registrant's WPPs 
designed to reasonably comply with the CEA and Commission regulations, 
assess the effectiveness of the WPPs, and discuss any areas of 
improvement and recommended changes or improvements to the Registrant's 
compliance program.\41\ The current language of Sec.  3.3(e)(2) applies 
these three requirements to each applicable CFTC regulatory requirement 
to which the Registrant is subject. In other words, for each applicable 
CFTC requirement the CCO Annual Report must identify a WPP, assess the 
WPP, and discuss related areas of improvement.
---------------------------------------------------------------------------

    \41\ See 17 CFR 3.3(e)(2)(i)-(iii).
---------------------------------------------------------------------------

    After adoption of the rule, Commission staff received industry 
feedback indicating that the amount of time and resources needed for 
the review described above makes the process burdensome when compared 
to the intrinsic value of this portion of the report, particularly 
given that many of the WPPs do not change from year to year.\42\ 
Commission staff has also observed that many of the CCO Annual Reports 
provide the detail required in a rote manner, but contain limited 
substantive discussion regarding areas of improvement and recommended 
changes to the compliance program, especially where such modifications 
may relate to the remediation of

[[Page 21334]]

material noncompliance issues.\43\ This observation raises concerns as 
to whether the CCO Annual Report requirements are promoting an active, 
on-going self-evaluation or, instead, encouraging a more limited, 
``check-the-box'' appraisal.
---------------------------------------------------------------------------

    \42\ To alleviate some of this burden, Commission staff 
indicated in guidance that a chart may provide an appropriate 
mechanism for efficiently addressing the requirements of Sec.  
3.3(e)(2) for purposes of the CCO Annual Report. CFTC Staff Advisory 
No. 14-153 at 6 (Dec. 22, 2014) (``CCO Annual Report Advisory''). 
However, the Commission believes that while use of a chart may 
streamline the presentation of information, it does not 
fundamentally change the burden of the underlying review and 
assessment.
    \43\ See 17 CFR 3.3(e)(5).
---------------------------------------------------------------------------

    Based on the foregoing, the Commission is proposing to amend Sec.  
3.3(e)(2) to eliminate the requirement to address ``each applicable 
requirement under the Act and Commission regulations'' and make other 
conforming edits. In addition, Sec.  3.3(e)(2)(i) is being deleted 
because Registrants are already required by Sec.  3.3(e)(1) to describe 
their WPPs.\44\ The Commission believes that the intent of CEA section 
4s(k)(3)(A) and the purpose of the CCO Annual Report may be met where 
Registrants provide summaries of their WPPs coupled with a detailed 
discussion of their annual assessment and recommended improvements.\45\
---------------------------------------------------------------------------

    \44\ Although the requirement to identify WPPs that are 
reasonably designed to ensure compliance is being deleted, the 
Commission notes that it can gain access to each of the Registrant's 
policies and procedures through the Commission's authority to 
request the production of books and records under Sec.  1.31, 17 CFR 
1.31.
    \45\ Consistent with the CCO Annual Report Advisory, Registrants 
may continue to use a chart to present assessment and review 
findings, as well as other information required by Sec.  3.3(e). 
However, the use of a chart does not alleviate the requirement to 
provide meaningful, substantive discussion where required. CCO 
Annual Report Advisory at 9-11.
---------------------------------------------------------------------------

    As a related change, Sec.  3.3(f) specifically contains the full 
requirements regarding delivery of the CCO Annual Report. To eliminate 
confusion and unnecessary duplication, the Commission proposes to amend 
Sec.  3.3(e) to remove the duplicative text regarding the duty to 
furnish the CCO Annual Report.
    The Commission is also proposing to amend Sec.  3.3(e)(4), which 
requires that the Registrant describe in the CCO Annual Report its 
financial, managerial, operational, and staffing resources set aside 
for compliance with the Act and Commission regulations. Commission 
staff has received a number of questions regarding whether the 
description need only cover resources for the activities for which the 
Registrant is registered or must also address other activities covered 
by the Act and Commission regulations. The Commission is proposing to 
amend Sec.  3.3(e)(4) to clarify that the discussion is limited to 
resources allocated to the specific activities for which the Registrant 
is registered. It is the Commission's view that the CCO Annual Report 
is meant to be a report regarding a Registrant's business as an FCM, 
SD, or MSP, and therefore information need only be included in the CCO 
Annual Report to the extent it is related to, or impacts, that part of 
the Registrant's business.
    The changes to Sec.  3.3(e)(2) in this proposal closely parallel 
SEC rule 15Fk-1(c)(2).\46\ The Commission believes that greater 
efficiencies can be achieved for dual CFTC and SEC Registrants when the 
structure and content requirements for both CCO Annual Reports is 
consistent.
---------------------------------------------------------------------------

    \46\ See SEC Adopting Release, 81 FR at 30058; 17 CFR 240.15Fk-
1(c)(2)(A).
---------------------------------------------------------------------------

    Finally, to fully implement the amendments to Sec.  3.3(e), the 
Commission is proposing to renumber current Sec.  3.3(e)(3) as Sec.  
3.3(e)(6), to account for the proposed renumbering of the other content 
requirements in current Sec.  3.3(e)(2).
2. Regulation 3.3(f)--Furnishing the Annual Report to the Commission
    CEA section 4s(k)(3)(B) requires the CCO Annual Report to, among 
other things, be furnished to the Commission and include a 
certification that the report is accurate and complete. Paragraph (f) 
of Sec.  3.3 implements this requirement.
    Section 3.3(f)(1) only requires delivery of the CCO Annual Report 
to the board of directors or the senior officer of the Registrant in 
addition to the Commission. The Commission is proposing to amend Sec.  
3.3(f)(1) to require a Registrant to provide its CCO Annual Report to 
its audit committee (or equivalent body), the board of directors, and 
the senior officer prior to furnishing it to the Commission.\47\ This 
amendment would align this requirement with that of the SEC's 
corresponding rule, 15Fk-1(c)(2)(ii)(B). In requiring the SEC CCO 
Annual Report to be delivered to the audit committee, the SEC stated 
that requiring submission to the audit committee, in addition to the 
board and the senior officer, further ensures that all groups with 
overall responsibility for governance and internal controls remain 
informed of the SEC Registrant's compliance program.\48\ The Commission 
agrees with this policy goal and also believes that further aligning 
our rules provides for greater efficiency.
---------------------------------------------------------------------------

    \47\ Per its longstanding position, the Commission is 
reiterating that in the event a Registrant does not have a board of 
directors, under the proposed amendment, the CCO Annual Report would 
be furnished to the senior officer and audit committee, or other 
equivalent body or group performing the auditing function.
    \48\ SEC Adopting Release, 81 FR at 30059.
---------------------------------------------------------------------------

    Request for comment: The Commission requests comment regarding the 
proposed amendments to the CCO Annual Report's requirements in Sec.  
3.3(e) and (f). The Commission encourages all comments, including 
background information, actual market examples, best practice 
principles, and estimates of any asserted costs and expenses. Regarding 
the proposed CCO Annual Report amendments, the Commission specifically 
requests comment on the following questions:
     Are the proposed amendments to the CCO Annual Report's 
content requirements in Sec.  3.3(e) appropriate? If not, what 
modifications to the content requirements should be made?
     What, if any, transition or ongoing costs or savings would 
result from such changes? Please provide details and estimates 
regarding any asserted costs or savings.
     Would the proposed amendments to the CCO Annual Report's 
submission requirements in Sec.  3.3(f)(1) cause undue burden? Is it 
appropriate for the audit committee to receive the CCO Annual Report?
     Should the Commission make any other changes to Sec.  
3.3(f) to further harmonize with the SEC?

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \49\ requires that 
agencies consider whether a proposed rule will have a significant 
economic impact on a substantial number of small entities and, if so, 
provide a regulatory flexibility analysis of the impact. The proposed 
amendments define the term ``senior officer;'' clarify the scope of a 
CCO's duties and the content requirements of the CCO Annual Report; and 
modify the CCO Annual Report delivery requirement. The proposed 
amendments would affect FCMs, SDs, and MSPs that are required to be 
registered with the Commission. The Commission has previously 
established certain definitions of ``small entities'' to be used in 
evaluating the impact of its regulations on small entities in 
accordance with the RFA, and has previously determined that FCMs, SDs, 
and MSPs are not small entities for purposes of the RFA.\50\ Therefore, 
the Commission believes that the amendments to the CCO Rules would not 
have a significant economic impact on a substantial number of small

[[Page 21335]]

entities. Accordingly, the Acting Chairman, on behalf of the 
Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the 
proposed amendments will not have a significant economic impact on a 
substantial number of small entities.
---------------------------------------------------------------------------

    \49\ 5 U.S.C. 601 et seq.
    \50\ See Policy Statement and Establishment of Definitions of 
``Small Entities'' for Purposes of the Regulatory Flexibility Act, 
47 FR 18618, 18619 (Apr. 30, 1982) (FCMs); Further Definition of 
``Swap Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap 
Participant,'' ``Major Security-Based Swap Participant'' and 
``Eligible Contract Participant,'' 77 FR 30596, 30701 (May 23, 2012) 
(SDs and MSPs).
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \51\ provides that a 
federal agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a 
currently valid control number issued by the Office of Management and 
Budget (``OMB''). The collection of information related to this 
proposed rule is OMB control number 3038-0080--Annual Report for Chief 
Compliance Officer of Registrants. As a general matter, the proposed 
amendments to the CCO Rules: (1) Define the term ``senior officer''; 
(2) clarify the scope of the CCO duties and the content requirements of 
the CCO Annual Report; and (3) add the Registrant's audit committee as 
a party that must receive the CCO Annual Report. The Commission 
believes that the proposed amendments will not impose any new 
information collection requirements that require approval of OMB under 
the PRA. As such, the proposed amendments do not impose any new burden 
or any new information collection requirements in addition to those 
that already exist in connection with the preparation and delivery of 
the CCO Annual Report pursuant to the Commission's regulations.
---------------------------------------------------------------------------

    \51\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

C. Cost-Benefit Considerations

    As discussed above, the Commission is proposing amendments to the 
CCO Rules that would: (1) Define the term ``senior officer''; (2) 
provide greater specificity regarding the scope of the CCO's duties; 
(3) clarify the content requirements for the CCO Annual Report; and (4) 
require a Registrant's audit committee (or equivalent body), board of 
directors, and the senior officer to receive the CCO Annual Report. The 
baseline for this cost and benefit consideration is existing Sec.  
3.3.\52\
---------------------------------------------------------------------------

    \52\ The Commission notes that adding a definition of ``senior 
officer'' would be effected by amending Sec.  3.1. The Commission 
believes this addition in and of itself has no impact for purposes 
of determining the costs and benefits of the proposal, and, 
therefore, is restricting its analysis of the costs and benefits to 
the proposed amendments to Sec.  3.3. Nevertheless, the Commission 
is seeking public comment on whether the definition of ``senior 
officer'' has any cost and benefit considerations.
---------------------------------------------------------------------------

    The proposed amendments to Sec.  3.3(d) do not change the CCO 
duties, but rather provide greater specificity regarding the scope of 
the CCO's duties and further harmonize with the SEC's security-based 
swap dealer CCO duties. The Commission expects that greater clarity 
concerning CCO responsibilities will reduce the potential burdens on 
CCOs and improve the benefits of compliance by allowing CCOs to better 
focus on the fundamental compliance aspects of their responsibilities. 
Additionally, by further harmonizing the CFTC's and SEC's CCO duties, 
CCOs of dual registrants should be able to fulfill their duties more 
cost effectively.
    Because the proposed amendments to Sec.  3.3(d) do not expand the 
CCO duties, the Commission preliminarily believes that the proposal 
would not impose any additional costs to Registrants, market 
participants, the markets, or the general public. The Commission, 
however, invites comment regarding the nature of, and the extent to 
which, costs associated with the CCO duties described in Sec.  3.3(d) 
could change as a result of the adoption of the proposal and, to the 
extent they can be quantified, monetary and other numerical estimates 
thereof.
    As discussed more fully above, in implementing Sec.  3.3(e) and 
(f), the Commission received consistent feedback from Registrants that 
the exercise of documenting their assessment on a requirement-by-
requirement basis was creating a significant economic burden with 
respect to time and resources. The proposed amendments to eliminate the 
requirement-by-requirement assessment are intended to reduce the cost 
to Registrants of producing the CCO Annual Report while maintaining its 
critical purpose. By reducing the burden associated with this aspect of 
the CCO Annual Report, CCO and other compliance resources may be better 
focused on other compliance functions. In addition, the amendments 
would harmonize certain CFTC and SEC CCO Annual Report content 
requirements in an effort to reduce the costs to dual registrants of 
complying with two regulatory regimes. The Commission believes that the 
foregoing amendments would also provide relief for Registrants from 
resource and time pressures in preparing their CCO Annual Reports.
    The Commission recognizes that the CCO Annual Reports may contain 
less content if the proposed amendments are adopted because of the 
removal of the process of documenting a review for hundreds of 
individual regulatory requirements. However, many of the requirements 
are inter-related and are better addressed collectively.\53\ In 
addition, eliminating this process should allow Registrants to focus 
more fully on completing their internal review processes and encourage 
more focused discussion of material issues in the CCO Annual Report. 
While the proposed amendments may require less description and 
classification, the Commission believes that a more focused, 
substantive discussion of the Registrant's assessment and material 
compliance issues will result in a CCO Annual Report that is a more 
effective tool for informing both the Registrant's senior management 
and the Commission as to the status of compliance at the firm.
---------------------------------------------------------------------------

    \53\ For example, under the current regulations 3.3(e) and (f), 
an assessment of Sec. Sec.  23.400 through 23.451, 17 CFR 23.400 
through 23.451, governing business conduct standards for swap 
dealers and major swap participants with counterparties would 
require a separate assessment of each rule, and in many cases, each 
subsection as a separate ``requirement.'' However, because these 
regulations all address external business conduct standards, it may 
be appropriate to address these rules together.
---------------------------------------------------------------------------

1. Section 15(a) Factors
    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders.\54\ Section 15(a) further 
specifies that the costs and benefits shall be evaluated in light of 
five broad areas of market and public concern: (1) Protection of market 
participants and the public; (2) efficiency, competitiveness, and 
financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations. The Commission considers the costs and benefits 
resulting from its discretionary determinations with respect to the 
section 15(a) factors.
---------------------------------------------------------------------------

    \54\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    The Commission believes that the CCO Rules reinforce the CEA's 
protections for swap markets participants, futures market participants, 
and the public as more fully described in the CCO Rules Adopting 
Release.\55\ This proposal does not seek to diminish either the role of 
the CCO or the value of the CCO Annual Report. On the contrary, the 
Commission believes that the proposal will provide the CCO with greater 
flexibility in accomplishing their duties and focusing compliance 
resources. Further, the proposal should lead to a CCO Annual Report 
that more effectively and efficiently focuses the Registrant's board, 
senior management,

[[Page 21336]]

and as proposed, the audit committee, as well as the Commission on 
areas requiring change or improvement.
---------------------------------------------------------------------------

    \55\ See, e.g., CCO Rules Adopting Release, 77 FR at 20193.
---------------------------------------------------------------------------

a. Protection of Market Participants and the Public
    The proposed amendments will continue to protect market 
participants and the public because they do not fundamentally alter the 
CCO duties or the annual compliance reporting requirements of Sec.  
3.3. While the amendment removing the requirement-by-requirement 
reporting may reduce the reporting detail, the Commission believes that 
change will allow the CCO to focus on identifying and describing in the 
CCO Annual Report material compliance matters that deserve greater 
attention. Accordingly, the Commission preliminarily believes that the 
reduction in content requirements will not affect the protection of 
market participants and the public.
b. Efficiency, Competitiveness, and Financial Integrity of Markets
    The Commission preliminarily believes that the proposed amendments 
to the CCO Rules could improve resource allocational efficiency for 
Registrants by reducing the burden to produce the CCO Annual Reports 
thereby allowing Registrants to allocate compliance resources used for 
report preparation more efficiently. Furthermore, entities that are 
dually registered with the CFTC and SEC and that must comply with the 
CCO Rules are likely to benefit from greater efficiencies to the extent 
the two agencies' parallel regulations are consistent. The Commission 
preliminarily believes that the proposed amendments to the CCO Rules 
will not have any negative impacts on market efficiency, 
competitiveness, or integrity because each CCO Annual Report addresses 
internal compliance programs of each Registrant and are not publicly 
available, and the amendments affecting CCO duties only clarify those 
duties and do not affect markets.
c. Price Discovery
    The Commission has not identified a specific effect on price 
discovery as a result of the proposal because the proposal does not 
address any pricing issues. Nevertheless, the Commission seeks public 
comment on this issue.
d. Sound Risk Management Practices
    The Commission preliminarily believes that the proposed amendments 
to the CCO duties and CCO Annual Report requirements would not have a 
meaningful effect on the risk management practices of Registrants. The 
proposed amendments relating to the CCO's duties and annual report do 
not directly impact a Registrant's risk management practices because 
they clarify the scope of the CCO's duties and CCO Annual Report 
contents, and do not require changes to a Registrant's risk management 
program.\56\ Furthermore, the proposed amendments to the content 
requirements do not affect the Registrant's obligation to address 
material noncompliance issues relating to its risk management program 
in the CCO Annual Report. Finally, the Commission preliminarily 
believes that including the audit committee and both the board of 
directors and the senior officer as recipients of the CCO Annual 
Reports may benefit Registrants' overall risk management practices by 
ensuring that all groups with overall responsibility for governance and 
internal controls are informed of the report contents.
---------------------------------------------------------------------------

    \56\ See, e.g., 17 CFR 23.600.
---------------------------------------------------------------------------

e. Other Public Interest Considerations
    The Commission has not identified any other public interest 
considerations for this rulemaking.
    Request for Comment: The Commission invites comment on its 
preliminary consideration of the costs and benefits associated with the 
proposal, especially with respect to the five factors the Commission is 
required to consider under CEA section 15(a). In addressing these areas 
and any other aspect of the Commission's preliminary cost-benefit 
considerations, the Commission encourages commenters to submit any data 
or other information they may have quantifying and/or qualifying the 
costs and benefits of the proposal.

List of Subjects in 17 CFR Part 3

    Registration.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR part 3 as set forth below:

PART 3--REGISTRATION

0
1. The authority citation for part 3 continues to read as follows:

    Authority: 5 U.S.C. 552, 552b; 7 U.S.C. 1a, 2, 6a, 6b, 6b-1, 6c, 
6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12, 12a, 
13b, 13c, 16a, 18, 19, 21, and 23, as amended by Title VII of Pub. 
L. 111-203, 124 Stat. 1376.

0
2. In Sec.  3.1, add paragraph (j) to read as follows:


Sec.  3.1  Definitions.

* * * * *
    (j) Senior officer. Senior officer means the chief executive 
officer or other equivalent officer of a registrant.

0
3. In Sec.  3.3, revise paragraphs (d), (e), and (f)(1) to read as 
follows:


Sec.  3.3  Chief compliance officer.

* * * * *
    (d) Chief compliance officer duties. The chief compliance officer's 
duties shall include, but are not limited to:
    (1) Administering each of the registrant's policies and procedures 
relating to its business as a futures commission merchant, swap dealer, 
or major swap participant that are required to be established pursuant 
to the Act and Commission regulations;
    (2) In consultation with the board of directors or the senior 
officer, taking reasonable steps to resolve any conflicts of interest 
that may arise;
    (3) Taking reasonable steps to ensure compliance with the Act and 
Commission regulations relating to the registrant's business as a 
futures commission merchant, swap dealer or major swap participant, 
including through ensuring that the registrant establishes, maintains, 
and reviews written policies and procedures reasonably designed to 
achieve compliance;
    (4) Establishing, maintaining, and reviewing written policies and 
procedures reasonably designed to remediate noncompliance issues 
identified by the chief compliance officer through any means, including 
any: Compliance office review, look-back, internal or external audit 
finding, self-reporting to the Commission and other appropriate 
authorities, or complaint that can be validated;
    (5) Establishing written procedures reasonably designed for the 
handling, management response, remediation, retesting, and resolution 
of noncompliance issues; and
    (6) Preparing and signing the annual report required under 
paragraphs (e) and (f) of this section.
    (e) Annual report. The chief compliance officer annually shall 
prepare a written report that covers the most recently completed fiscal 
year of the futures commission merchant, swap dealer, or major swap 
participant. The annual report shall, at a minimum, contain a 
description of:
    (1) The written policies and procedures of the futures commission 
merchant, swap dealer, or major swap participant described in paragraph 
(d) of this section, including the code of ethics and conflicts of 
interest policies;
    (2) The futures commission merchant's, swap dealer's or major swap 
participant's assessment of the

[[Page 21337]]

effectiveness of its policies and procedures relating to its business 
as a futures commission merchant, swap dealer or major swap 
participant;
    (3) Areas for improvement, and recommended potential or prospective 
changes or improvements to its compliance program and resources devoted 
to compliance;
    (4) The financial, managerial, operational, and staffing resources 
set aside for compliance with respect to the Act and Commission 
regulations relating to its business as a futures commission merchant, 
swap dealer or major swap participant, including any material 
deficiencies in such resources;
    (5) Any material noncompliance issues identified and the 
corresponding action taken; and
    (6) Any material changes to compliance policies and procedures 
during the coverage period for the report.
    (f) Furnishing the annual report to the Commission. (1) Prior to 
furnishing the annual report to the Commission, the chief compliance 
officer shall provide the annual report to the board of directors, the 
senior officer, and the audit committee (or equivalent body) of the 
futures commission merchant, swap dealer, or major swap participant for 
its review. Furnishing the annual report to the board of directors, the 
senior officer, and the audit committee (or equivalent body) shall be 
recorded in the board minutes or otherwise, as evidence of compliance 
with this requirement.
* * * * *

    Issued in Washington, DC, on May 3, 2017, by the Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.

    Note: The following appendix will not appear in the Code of 
Federal Regulations.

Appendix to Chief Compliance Officer Duties and Annual Report 
Requirements for Futures Commission Merchants, Swap Dealers, and Major 
Swap Participants; Amendments--Commission Voting Summary

    On this matter, Acting Chairman Giancarlo and Commissioner Bowen 
voted in the affirmative. No Commissioner voted in the negative.

[FR Doc. 2017-09229 Filed 5-5-17; 8:45 am]
BILLING CODE 6351-01-P